Wondering why some of your Pharma shares keep going up? Thank Trump’s tax “reform;” no, really.

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The News:

The drug industry has taken heat from patient advocates and a US senator for handing out its tax savings to shareholders instead of using its windfall to help patients lower drug prices. Now, one of its own also is calling out the industry.

At a BIO panel last week, Ovid Therapeutics Inc.’s (New York City) CEO Jeremy Levin, formerly Teva’s leader, said the industry should have focused on building up their businesses, rather than buying back shares, according to Scrip Pharma Intelligence. Top drugmakers have announced at least $50 billion in buybacks in recent months, FiercePharma reports.

Levin previously made that argument at the J.P. Morgan Healthcare Conference in San Francisco, shortly after the US government ushered in its tax changes–and before most of Big Pharma had decided what, exactly, to do with the money.

At the January panel, Levin called on pharma to boost spending in individual disease areas such as Alzheimer’s rather than buying back “a single share” or paying out larger dividends. He also said the industry should change executive compensation strategies to prioritize drug development.

Five US drug companies–Pfizer, Merck, AbbVie, Amgen and Celgene–implemented share buybacks totaling $45 billion before or shortly after US lawmakers passed tax reform, according to an April report from Sen. Cory Booker (D-NJ). With the savings from the law, Booker said, companies should have lowered their drug prices.

PhRMA responded that the companies were “cherry picked for inclusion” in Booker’s report, adding that those drugmakers had committed $23 billion for US capital projects and R&D. In addition to buybacks, companies have also announced some increases in employee pay or bonuses and charitable contributions. Amgen, for example, unveiled a plan to build a $165 million “next-generation” biomanufacturing plant in Rhode Island. AbbVie recently donated $100 million to Puerto Rico hurricane relief efforts.

In earnings releases and conference calls after the law made its way through government, executives for Pfizer, Amgen, Regeneron, AbbVie and many other companies said they expect lower tax rates. Allergan, Teva, Novartis and AstraZeneca said they expect increases.

Projected tax rate decreases as a result of tax reform:

Projected tax rate increases:

Steve’s Take:

For many years I’ve marveled at how the price of some Pharma shares almost always go up, year-to-year. No matter what. But with the Trump-sponsored tax giveaway to corporations, an incredibly simple mathematical equation explains this phenomenon.

Bob Herman at Axios sums it up:

“The pharmaceutical industry is using a large portion of its windfall from Republicans’ corporate tax cuts to boost its stock prices. Nine drug companies are spending a combined $50 billion on new share buyback programs, a sum that towers over investments in employees or drug research and development.”

All of those buybacks were announced during or after the passage of the Republican tax bill. That money is enriching hedge funds, other Wall Street investors and top drug company executives.

New pharma company share buybacks announced during or since passage of Trump tax bill:

  • Abbvie: $10 Billion
  • Pfizer: $10 Billion
  • Merck: $10 Billion
  • Amgen: $10 Billion
  • Celgene: $5 Billion
  • Allergan: $2 Billion
  • Baxter: $1.5 Billion
  • Cardinal: $1 Billion
  • Vertex: $500 Million

Total: $50 Billion

Data: Company documents; Chart: Andrew Witherspoon; Axios

The benefits don’t stop there.

Some drug companies also increased quarterly dividends following the tax overhaul. For example, Abbvie increased its cash dividend by 35% while at the same time committing to a new $10 billion share repurchase program. Dividends distribute cash to existing investors, and share buybacks boost a company’s stock price by making shares scarcer.

The new tax law, which slashed the corporate tax rate and made it easier for companies to repatriate overseas cash, has made dividends and share buybacks quick and appealing options.

Several drug company buybacks are significantly larger than prior share repurchase programs, Herman contends:

“Stock returns help people with 401k retirement accounts, but they mostly benefit wealthy investors and executives. And half of US households don’t own any stock.”

Derek Lowe at Science Translational Magazine also weighed in:

“There’s a lot of repatriated corporate money sloshing around these days thanks to the recent tax code changes. The larger pharma companies were certainly beneficiaries, with lots of foreign operating profits that they didn’t want to bring back to the US under the formerly higher corporate tax rates–you’ll recall that this was the entire reason Pfizer tried to do deals with AstraZeneca and then with Allergan, both non-US companies.”

It’s no secret that merger and acquisition activity in the healthcare industry has been steadily climbing for the last few years, but according to data compiled and reported by Bloomberg, 2018 started off with the biggest bang in a decade.

Glaxo recently jumped on a deal to buy Novartis AG’s stake in a consumer health joint venture, a deal valued at $13 billion. January saw a historic deal for Celgene with a $9 billion acquisition of Juno Therapeutics and a $1.1 billion deal that secured them Impact Biomedicines. Sanofi has scored $15 billion in various deals this year, the report said.

And this week, the Wall Street Journal reported that medical device maker Stryker Corp has unveiled a takeover approach of Boston Scientific Corp. The latter has a market value of $44 billion as of Friday’s close.

By the end of the first quarter, roughly $156 billion in deals are already done thanks to pharma giants like Sanofi, GlaxoSmithKline and Celgene, and a pending deal with Takeda Pharmaceutical Company’s acquisition of Shire that is valued at $62 billion would propel 2018’s year-to-date M&A to well over $200 billion, making for a record breaking first quarter the likes of which hasn’t been seen in at least 12 years, Bloomberg reported.

Despite the muscular M&A scene, the NY Times’ “Dealbook” reports that the first quarter has already set the record in announced share buybacks, and biopharma has been doing its part.

Lowe notes that:

“Buying your own stock is basically a no-brainer…it’s really the least controversial thing a company can do with a pile of extra cash, and it requires almost no thought or effort to set up. The stock price gets support from the purchases, both directly and because the company has announced its own confidence in the stock itself, and the earnings per share get set to increase as shares are purchased and then retired. What’s not to like?”

The unfriendly aspect of stock buybacks is for a research-driven company to announce that it can earn better returns off its own shares than it can by spending the money on research. Lowe makes the point that Pfizer, Merck, AbbVie, and Amgen have each announced $10 billion buyback plans, which is a larger sum for each of them than any of their total R&D budgets.

Bottom Line:

Of course, a higher stock market isn’t usually a drag on the economy, but share buybacks are a rather circuitous strategy for improving upon the economic climate. Remember that the great majority of shares are owned by the 10% wealthiest of the population.

Steve's Take: #stock buybacks and higher #dividends are nice, but it's time to get those R&D budgets and #drug access programs up to record levels, too. Click To Tweet

That brings up the main point of the Dealbook piece, namely, the effect of the corporate tax reform itself. The administration, predictably enough, sold this idea as a way to spur investment into jobs, facilities, and operations in the US. But it doesn’t seem to be working out that way. Yes, it’s comforting that there may be more M&A activity added to this so-far explosive year. But it’s another question entirely whether such activity is of benefit to the broader economy.

As for the biopharma industry, buying out smaller companies is one of the anticipated outcomes of venture capital investment, so that’s built in as part of the overall operating environment. Fewer companies would be started in the first place if that weren’t as much of an option.

Lowe asks whether we’ll start seeing more spending on research? More investment in smaller startups? Or will everyone just quietly buy back shares and bank their executive bonuses?

My guess is that Pharma execs aren’t unaware of the voices like Levin, Lowe and Herman who want to know how the Trump tax reform giveaway to Pharma is going to help the sick. Time to get those R&D budgets and drug access programs up to record levels, too.

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